Eurozone and US could bring both bad and good news

Global emerging markets losses were provided with a slight buffer at the start of September following Ben Bernanke’s speech at the annual Jackson Hole meeting of central bankers.

During his speech, the Federal Reserve chairman displayed a strong bias in favour of further quantitative easing (QE), as he laid out its potential benefits and costs. He concluded that the benefits of previous rounds of QE have been important, for example in terms of reducing unemployment, and that the costs were not likely to be too high at present.

While refraining from an explicit commitment to do more QE, Mr Bernanke did end his speech by repeating the phrase from the Fed’s August policy meeting that “the Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.” He also said that “the stagnation of the labour market in particular is a grave concern.” On September 13, Mr Bernanke duly announced a third round of QE, sending markets higher in response.

Looking east, August was a different story. Asian equities took a breather as investors assessed earnings season and the possibility of further policy actions. Earnings from the first half of the year were reasonable. Some 75 per cent of companies either met or beat expectations. But 2012 earnings forecasts for the Asia Pacific region excluding Japan were revised down 0.7 per cent. There was no clear trend in sector performance – healthcare, staples and discretionary stocks all made gains.

During August, the MSCI China 10/40 index also dropped by 3 per cent due to weaker economic data and the perceived absence of any significant policy response. The most recent export, retail sales and industrial production figures all disappointed. However, growth in fixed investment remained stable and the full impact of recent policy measures are yet to be felt within the economy. Healthcare, technology and staples all made reasonable gains – industrials, telecommunications and financials dragged the index into negative territory. Some 50 per cent of Chinese companies met first half earnings expectations and 25 per cent beat them.

India’s second quarter GDP growth also came in ahead of expectations, at 5.5 per cent year-on-year compared with a market consensus of 5.2 per cent. The country witnessed 5.3 per cent growth during the first three months of the year – the slowest pace in three years. But its second quarter growth was still much slower than the growth rates the government is targeting, with private consumption slowing down significantly and investment remaining weak, while net exports still contributed negatively to growth.